Question 1

Does a rise in income always cause demand to increase?

Accepted Answer

Not necessarily. For 'normal goods', a rise in income leads to an increase in demand (a rightward shift of the demand curve). However, for 'inferior goods' (e.g., budget supermarket brands, bus travel), a rise in income causes demand to fall (a leftward shift) as consumers can now afford and switch to higher-quality alternatives. It is crucial to distinguish between these two types of goods.

Question 2

If demand for a product increases, won't producers just shift their supply curve to meet it?

Accepted Answer

This is a common misconception. A shift in the demand curve (e.g., due to a successful advertising campaign) does not cause the supply curve itself to shift. Instead, the increase in demand creates a shortage at the original price. This shortage causes the price to be bid up. The higher price then signals to producers to offer more for sale, resulting in an upward *movement along* the existing supply curve to a new, higher equilibrium quantity. The supply curve only shifts if a non-price determinant of supply, like production costs, changes.

Question 3

Why is the supply curve upward sloping? Don't businesses want to sell as much as possible at any price?

Accepted Answer

While businesses want to maximise profit, the upward-sloping supply curve reflects the reality of production costs. To increase output, a firm often faces higher marginal costs (the cost of producing one more unit), perhaps due to needing to pay workers overtime or using less efficient machinery more intensively. Therefore, a higher price is required to justify and cover these higher costs. Furthermore, a higher market price can attract new, less efficient firms into the market, whose costs are only covered at that higher price, thus increasing the overall quantity supplied.

Demand

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Demand